Entry Tax on Goods imported into States

Jindal Stainless Limited along with companies like Vedanta, Hindalco, Reliance Industries and others (collectively, “Appellants”), in an appeal to the Supreme Court, challenged the decision of multiple High Courts, which imposed entry tax on goods that are being imported in their respective state. The Appellants contended that such decision of the High Courts is violative of Article 301 of the Indian Constitution, which ensures free trade and commerce throughout India. However, it was contended by the various states that they have a constitutional right to levy such tax and pass any other law with respect to subjects falling under the ‘State List’ and the ‘Concurrent List’.

Issues and Judgment:

1. The seven-judge bench headed by the Chief Justice of India held inter alia that the word ‘free’ used in Article 301 of the Constitution does not mean ‘free from taxation’.

2. Dealing with issue of discriminatory taxes, the Hon’ble SC held that only such taxes are discriminatory in nature which violate Article 304 (a) of the Constitution which says Legislature of the state may by law “impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced”. The court held that levy of the tax on the import of goods in itself is not an impediment under Article 301. However, the power to levy such taxes is subject to condition that similar goods manufactured or produced in the state levying the tax are also subject to tax and that there is no discrimination on that account between goods so imported and goods so manufactured and produced.

3. The bench dealing with the issue of reasonable restriction on non-discriminatory levy of taxes (Article 304 (a) and Article 304 (b)) held that Article 304 (a) & 304 (b) deal with two different subject matters. Clause (a) deals with imposition of tax and clause (b) deals with non-fiscal reasonable restriction in public interest. Since it does not include tax laws, therefore the two clauses should be understood independently and disjunctively. The court also held that a levy that violates 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso there under is satisfied.

4. The Compensatory Tax Theory evolved in Automobile Transport vs. State of Rajasthan & Atiabari Company vs. State of Assam has been rejected in the present case stating that the theory doesn’t have any legal basis or constitutional sanction. According to the theory, tax has to be compensatory in nature but the bench considered it outside the purview of Article 301 and consequently immune from any challenge on the ground that these taxes and levies were unreasonable restrictions on the right to free trade and commerce, thereby rejecting it.

5. Any difference in the rate of tax on goods locally manufactured and those imported, such difference not being discriminatory does not fall foul of Article 304(a); Any incentives or benefits of concession in the rate of the tax given to the indigenous manufacturers in order to encourage the manufacture/production in the state cannot be said to be discriminatory. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters.

6. The sovereign and plenary power of the state to tax cannot be emasculated and made subject to a limitation that a state can only tax those goods which are produced within its territory. A tax on entry of goods into a local area for use, sale or consumption therein is permissible although similar goods are not produced within the taxing state. The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings.

7. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally. Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters. The court has referred the cases to regular bench for deciding whether the entry tax acts of various States discriminate between goods imported from outside the State and goods within the State.

Chief Justice of India had observed that the constitution does not see tax as a barrier but it should not be imposed in such a way that it acts as a “barrier and obstruction to free movement of goods.”

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